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Shares of SeeBeyond sank $3.65, or 55.5%, to $2.93, the lowest level this year, in recent trading. Shares of competitors
webMethods(WEBM) were down 6.8%,
Vitria Technology(VITR) was down 2.6%,
Tibco Software(TIBX - Get Report) was down 0.3% and
Iona(IONA) rose 2.1% in recent trading.

Credit Suisse First Boston, Legg Mason, ThinkEquity Partners, Pacific Growth Securities, Merrill Lynch and U.S. Bancorp Piper Jaffray downgraded their ratings on SeeBeyond after the company reported an 18% decline in first-quarter revenue Monday, falling short of analysts' lowered estimates. The Monrovia, Calif.-based company also lowered full-year guidance and said second quarter performance would be significantly below Wall Street expectations.

Perhaps most perplexing to investors, however, was the way the company fielded questions about its decision to defer some revenue, contributing to the miss. The company's deferred revenue rose $3.85 million to $27.7 million. Analysts figured between $1.6 million and $2 million of that was revenue that the company chose to defer rather than recognize in the first quarter.

Analysts complained the company did a poor job of communicating its situation by preannouncing and then reporting even lower revenue numbers. The decision to defer some revenue raised concerns about revenue recognition, a subject that has become touchy in the software world. In the past, software companies have been forced to restate numbers after booking deals that auditors said should be deferred, noted Jordan Klein, an analyst with UBS Warburg, who reiterated his buy rating Tuesday. His firm co-managed the company's secondary offering earlier this year.

John Ederer, an analyst with Pacific Growth Equities, noted that the first quarter took on more importance because it was the first following that offering, which was meant to push the company's cash position to $100 million to improve its position against competition. "We suspect that for many of the investors who participated in the offering, missing the first quarter out of the gate will be inexcusable," Ederer said in a note. "We believe that some time will be needed for the management team to rebuild credibility with the investment community."

Ederer downgraded SeeBeyond's rating to a market perform from a buy and cut his price target in half to $9. "However, we do not believe that this is an entirely broken company, but rather one that is facing a difficult market environment and some near-term operating issues," Ederer said. His company hasn't done any banking business with SeeBeyond.

Analysts said they believe the company's stock will remain low until they can prove themselves again in the next quarter or two.

SeeBeyond, which earlier this month said earnings would meet expectations but that revenue would fall slightly short, said first-quarter revenue fell to $40.36 million from $49.4 million in the same period a year earlier. The lowered consensus estimate was for the company to report revenue of $42 million, according to Thomson Financial/First Call.

At the beginning of the month, SeeBeyond said revenue would range from $42 million to $42.5 million. On Monday the company said a portion of the revenue included in that estimate was deferred. Sequentially, revenue in the seasonably weak first quarter fell 8.4%.

On a postclose conference call, analysts hounded the company with questions about its decision to defer some revenue into future quarters. "It's like they missed on purpose," said Erick Brethenoux, an analyst at Lazard Freres & Co., which has a hold rating on SeeBeyond. His firm hasn't done any banking with SeeBeyond.

When asked by analysts if that was purely by choice or whether auditors required SeeBeyond to recognize the revenue that way, the company did not answer outright.

"I think if we had gotten more than 3 cents a share
in earnings
I don't think anyone would have been appreciative," founder and CEO Jim Demetriades responded. Executives indicated that they thought deferring the revenue would help improve visibility in future quarters.

But analysts indicated in notes Tuesday that they believe just the opposite is happening. Both Merrill Lynch analyst Chris Shilakes and U.S. Bancorp Piper Jaffray analyst Michael Marzolf said in notes that they believe visibility has gotten worse. Marzolf, who lowered his rating to outperform from strong buy, cited the company's lowered guidance for sequentially flat revenue in the June quarter. He lowered his price target to $8 from $17. His firm has done banking with SeeBeyond.

Shilakes, who downgraded his rating to an intermediate-term neutral, long-term buy from intermediate-term buy, long-term strong buy, expressed concern that SeeBeyond's 70 quota-carrying sales reps are enough to keep the company from being outflanked by larger rivals. His company has done banking with SeeBeyond.

SeeBeyond reported net income of $2.9 million, or 3 cents a share, compared with a net loss of $4.4 million, or 6 cents a share, a year earlier. As the company preannounced, it also registered a pro forma profit excluding charges of 3 cents a share, in line with analyst estimates. That compares with a year-ago loss of 2 cents a share and a pro forma profit of 4 cents a share in the fourth quarter.

On a conference call after trading closed, CFO Barry Plaga said in the second quarter, the company expects to earn 1 cent a share on revenue ranging from $40 million to $42 million. Wall Street was expecting SeeBeyond to earn 4 cents a share on $47 million in revenue, according to Thomson Financial/First call.

For the full year, Plaga said the company expects to earn 7 cents to 10 cents a share on $170 million to $185 million in revenue. That's a major drop from SeeBeyond's guidance in January, when the company said it expects to earn 16 cents to 18 cents a share on revenue of between $200 million and $215 million.

"The IT recovery is not there yet," Demetriades said. "We have had to bring our expectations in line with a more conservative view of when acceleration in IT spending may occur."

However, Demetriades also said he is "very optimistic," noting he saw increased activity over what was experienced at the beginning of the first quarter, which ultimately became very back-end loaded in the last month. "As long as they decide not to buy toward the end of this quarter, we should be in very good shape," he said.

UBS Warburg's Klein said in his note that he suspects SeeBeyond is being to conservative, while at least one competitor, Tibco, may be too aggressive. Klein noted that Tibco slightly missed first-quarter revenue expectations but did not lower second-quarter or full-year guidance. Meanwhile, in another sign that SeeBeyond's problems may not be just the economic environment, competitor webMethods announced that its fiscal year fourth-quarter results for the period ending in March would exceed street estimates. WebMethods reports earnings Thursday. "I think they're all facing a tough environment," Klein said after the company's earnings call Monday. "I guess some companies are willing to roll the dice and have a higher level confidence than maybe SeeBeyond."

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